by MrBill » Thu 10 Aug 2006, 03:52:42
Crude is falling out of bed this morning, despite those draws yesterday. It looks like it just got overbought and now it is correcting? I was short, closed my short yesterday after that big draw in gasoline inventory, it went down overnight, and now it is lower again. And I made nothing! ; - ((
$this->bbcode_second_pass_quote('', 'Y')ou posted some fine information covering a lot of ground, but the matter of refinery utilization and capacity deserves more attention. And, no, your argument regarding refinery capacity holds no water. In order for refinery capacity to be an issue at the national level, even resulting from another major hurricane, the utilization rate would have to drop down into the 75%-86% range at the national level as it did for six weeks last year. This would mean that a number of refineries would have to go offline concurrently. Moreover, the availability of imported finished motor gasoline products would have to go flat, and that isn't the case at this time. Europe has plenty of spare motor gasoline production capability, as an example, and we still import finished motor oil depending on available pricing and excess product elsewhere. We also export finished motor gasoline.
Absent a major disaster, there is no shortage of refinery capacity in the U.S. based on available and utilized capacity considerations. None at the national level, not at the PADD level, and very few exceptions if any over the long term below the PADD level relative to regional and national demand requirements. We're still exporting finished gasoline product from the Gulf Coast PADD, for example. There is no refinery capacity shortage because the refineries have repeatedly improved their efficiencies significantly to add additional capacity.
Maybe it is just me? What you say makes sense. There is no supply shortage, but refining capacity still remains ‘the bottleneck for increased production’, if and when existing capacity is taken out of production due to refinery fires, blocked canals, hurricanes of other disruptions.
Perhaps my comments should be in the context of last summer as the long rally in the crude occurred against a backdrop of rising inventories. What was the market worried about? They were looking over the horizon for the next disruptive event and it came in the shape of Katerina/Rita.
This summer the event may be a closing of the Straits of Hormuz, but as Guest posted, the speculators own 2.3 barrels of oil in the form of futures contracts versus actual supply (I hope I got that right off the top of my head). That means they can carry those contracts to maturity and take delivery of the futures. No wonder the price is high. Who can deliver 2.3 times more product than exists?
In any case the whole complex is distorted by using a grade of crude, WTI which is light, sweet and low in sulfur, which is declining in availability, and being replaced by cash grades that are heavier, more sour and more expensive to refine, and therefore cannot be delivered against the WTI futures contract. Ditto for the MTBE unleaded contract. GSCI will phase-out its exposure to the HU contract during the SEP/OCT rollover, and thereafter only have exposure to the ethanol RBOB futures contracts. That will be a 72.222 contract drop in demand for unleaded from AUG. I guess that MTBE unleaded will then have to be re-exported? It will not be available for consumption in the USA.
Getting back to Old Vet's original question, why are prices so high when there is ample supply, is mostly because the integrated commercials can comfortably sell crude forward at the cost of full carry, knowing they have ample supplies to meet refining demand. And the refiners have also not aggressively had to hedge their forward production either due to the uncertainty surrounding the phase-out of MTBE for ethanol grade, the upgrades to low sulfur diesel, AND the outside possibility that storms in the Gulf later this year might affect refining capacity in the main coastal areas like last year. As gasoline stocks are now below 3-year averages, one or two major storms would further reduce that supply cushion, even as geo-political supply concerns from the ME, Iran in particular with the Straits of Hormuz, and disruptions of light Bonny sweet from Nigeria have still not been resolved.
So there is no shortage, but no one is willing to aggressively short the market, which given the length of the ETF/commodity hedge funds mean the risks are still skewed to the topside and supported by specs buying on the dips as well. The path of least resistance is sideways or up despite adequate supply.
Never the less according to CERA/JPMorgan and others there is more refining capacity and supply of crude expected to come online in 2007 through 2010, and if the US, and therefore the global economy, slow in 2007, that may well tip the supply/demand balance towards lower crude and refined product prices.
Unless those same geo-political concerns continue to dominate sentiment. I have been waiting all summer for the market to tire of problems in Iran and Nigeria and focus again on fundamentals, but they haven't, and just when we test the lower ends of the ranges, more violence kicks off in the ME. And we still do not know what the hurricane season will bring? Bah, what a way to make a living? Always looking for storm clouds over the horizon. If it was just about ample supplies to meet demand we could take $20 risk premium out of this market immediately. But as the blow-up at MotherRock amply demonstrates, being short can be hazardous to your financial health.
In other words, just because a train is on the wrong track, doesn't mean you want to stand in front of it! ; - )
p.s. think that the oilmen are investing, it is just they would prefer to invest free cash flow as opposed to going out on a limb to fund $3-5 billion projects with debt that may not come online until well after this spike in prices is by. Seems to be more JVs between OPEC and non-OPEC producers for refineries closer to end markets, like Saudi and Kuwaiti investment in Chindia and Russia’s Lukoil’s planned expansion in Turkey. Whereas in the USA upgrades versus new refineries seems to be easier from a regulatory/public policy/NIMBY point of view.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
However since the trend was sideways nothing was gained or loss. It was a wash.
